NFIB - Small Businesses Don't Agree With BLS

Since the release of the most recent BLS Employment Situation Report, which showed an astounding drop in the unemployment rate, I have spent a good bit of time dissecting the release and discussing why the real unemployment rate is really between 17% and 22% depending on how you calculate it. (See Here and Here) However, today's release of the September NFIB Small Business Survey shows the extent to which the current BLS employment calculation method may have detached from reality.

From the NFIB report: "September was another month of low expectations and pessimism for the small-business community, with the NFIB Small Business Optimism Index losing 0.1 points and falling to 92.8. The recession-level reading was pulled down by a deterioration in labor market indicators, with job creation plans plunging 6 points, job openings falling one point and more firms reporting decreases in employment than those reporting increases in employment. Since the commencement of NFIB’s monthly surveys in 1986, the Index has been below 93.0 a total of 56 times; 32 of which have occurred since the recovery began in June 2009."

The detachment between the real economy, and that reported by the government, continues to exasperate the best laid plans of the Department of Central Planning (aka the Fed). As reported the NFIB small business survey has remained mired at recessionary levels since statistical end of the last recession in 2009.

The ongoing problem remains "poor sales" which is the driver for all other business actions from increased capital expenditures to future employment. From the report: "Weak sales continue to be an albatross for the small-business community. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged at a negative 13 percent, cementing the 17 point decline since April and affirming weak GDP growth for the second quarter. Twenty-one (21) percent still cite weak sales as their top business problem—historically high, but down from the record 34 percent reached in March 2010. Seasonally unadjusted, 23 percent of all owners reported higher sales (last three months compared to prior three months, down 1 point) and 30 percent reported lower sales (up 1 point). Consumer spending remains weak and high energy costs continue to 'tax' consumer disposable income. The net percent of owners expecting higher real sales was unchanged at one percent of all owners (seasonally adjusted), down 11 points from the year high of net 12 percent in February. The weak reading is unlikely to trigger orders for new inventory or business expansion. Not seasonally adjusted, 24 percent expect improvement over the next three months (down 4 points) and 31 percent expect declines (up 3 points)."

The chart below shows capital expenditure plans versus future expectations about the economy. The importance here is that companies are primarily spending on maintenance of plants, property and equipment rather than expansion and upgrades. In the most recent report only 34% reported spending on new equipment which was down 7 points from August. Only 16% acquired vehicles - a decline of 5 points, and just 14% improved or expanded facilities which remained unchanged from the previous report. Overall, there was a substantial reduction in capital spending activity with the percent of owners planning capital outlays in the next three to six months falling 3 points to 21%.

If employment was surging as reported by the BLS in the last month these numbers should be rising as employers expend capital to boost production. Furthermore, if business were hiring as strongly as reported then the number of business owners who think that this is a "good time to expand" their businesses should be much higher than 7% which is just 50% of where it stood just prior to the last recession.

The disconnect between the BLS's employment survey which showed an increase of 574,000 non-farm payrolls in September, 114,000 after revisions, versus the NFIB which showed fewer jobs in September only adds further fuel to the debate. If the BLS report was correct then the NFIB report should be showing an increase in employment. However, the survey showed that not only have firms not hired in the last month but only 10% plan to increase employment at their firm in the next three months. This is down a full 3 points from the last report while 11% plan employment reductions, 2 points higher than last month, as well. On a seasonally adjusted the net percent of owners planning to create new jobs fell 6 points to 4% which is historically a very weak reading especially during an economic recovery.

Essentially, current levels of hiring are just keeping up with population growth, but not exceeding it. As discussed recently - a look at full-time employment relative to civilian the population shows that this is indeed the case. "Unlike the traditional employment metrics used by the BLS which have been adjusted to obfuscate the real employment situation - the level of full-time employment relative to the total population accounts for the movements into, and out of, the workforce. This calculation provides a better barometer of the economic health of the country."

The reality is that by this measure the real employment situation is running close to its worst levels since 1968.

There is really not much wonder as to why there has been such a lash back against the recent BLS jobs report over the last few days. This time, however, it has picked up high profile figures such as GE's former boss Jack Welch who tweeted just after the release on Friday: "Unbelievable jobs numbers ... these Chicago guys will do anything ... can't debate so change numbers" and Ken Langone. founder of Home Depot, also chimed in on CNBC saying: "Damn it, these numbers don't make sense."

However, it is not just the NFIB report that is showing lower levels of job creation that run counter to that of the BLS. Each month we update the STA Composite Employment Index which is an index of the employment subcomponents of the Chicago Fed National Activity Index, Chicago ISM, several regional Fed manufacturing indexes, ISM surveys and the NFIB report. As you can clearly see in the chart below not only has the 4-month average of the employment index deteriorated in the last month - it has fallen for six months straight from its peak in March of 26.46 to 18.42 today. A reading below 20 has normally been indicative of a recessionary economy.

No matter how you look at the data there is a clear disconnect between the BLS report and economic realities. From the NFIB's point view it is "economic uncertainty" that weighs on business owners and keeps them on the defensive. The actions by the Federal Reserve to buy bonds and inject liquidity into the financial system does not solve the problem of "poor sales", reduce regulations that strangle growth or solve the "fiscal cliff" issues that threaten business profitability by the end of the year.

Bill Dunkleberg from the NFIB sums it up best: "Politicians have little understanding of the costs their actions impose on the private sector. 'Frequent changes in the tax code' should not consistently rank in the top 15 problems that owners face."

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of "Street Talk with Lance Roberts", Chief Editor of "The X-Factor" Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In